How To Get To Your Money Before Age 59 1/2

If you read the fine print on your IRAs, 401Ks, and 403Bs, you’ve probably discovered that the government wants you to use the money for retirement, and also that the government feels that retirement shouldn’t start before age 59 1/2. But what if you want to retire before age 59 1/2? How can you get to your money without that pesky 10% penalty that comes with taking money out before age 59 1/2? Here are a few tips the pros use:

8 Tips for Getting To Your Money Before Age 59 1/2

# 1 Burn Your Taxable Account First

Your taxable account is your least tax-efficient way to invest. Yes, it has its tax benefits, but these pale in comparison to IRAs and 401Ks, especially when you consider the additional estate planning and asset protection benefits of a true retirement account. Most experts agree that an early retiree ought to hit up his taxable account before diving into his tax-protected ones for a number of reasons. First, you don’t pay any tax on your basis, which might be quite high. Second, long-term capital gains are only taxed at 5-15%, likely much less than your IRA withdrawals. Last, it leaves your IRA money to continue to compound at tax-free rates.

# 2 Drain that 457

A 457(b) is a tax-protected account available to many docs who work for university hospitals. If you have a 403B you ought to look and see if you have a 457 too. It allows you to squirrel away another $16,500 a year into a tax-protected account. It’s biggest downside is that the money is technically subject to your employer’s creditors. But that comes with several upsides. First, it gives you a tax-break just like a 401K or 403B. Second, it isn’t subject to YOUR creditors. Lastly, you can raid it as soon as you separate from your employer without having to worry about the age 59 1/2 rule. In fact, you probably should since it isn’t quite as separate from your employer’s money as your 403B account is. If you don’t want to spend the money, you can also roll it into an IRA. That, of course, makes it subject to the Age 59 1/2 rule, so don’t do it if you want to spend the money before then.

# 3 Take Advantage of the SEPP Rule

The Substantially Equal Periodic Payments (SEPP) rule is the little-known exception to get into your IRA as soon as you retire. You basically “annuitize” your IRA from the time you retire until 59 1/2. Your life expectancy is calculated, and you then must take out an equal amount each year equal to the balance of the IRA divided by your life expectancy. Once started, you must continue to take these withdrawals for at least 5 years, or until age 59 1/2. When you do this, you DO NOT have to pay the penalty (but of course do have to pay taxes due on a tax-deferred account.)

A First Home. Keep in mind the IRS definition of a “first home” is that you haven’t owned one for the last 2 years. Also, it doesn’t have to be YOUR first home, it can be your kid’s or grandkid’s first home too. See how this works? You pull out $10K from your IRA to pay toward their home, and they gift you $10K for Christmas. No 10% due. Ethical? Perhaps not. Legal? Certainly. Keep in mind there is a $10K limit.

IRS Levy

Reservist Distribution A military reservist can withdraw money while activated without paying the 10% penalty.

Although after age 65, an HSA can serve as just another IRA, withdrawals for qualified medical expenses are always tax and penalty free.

# 6 Roth IRA Contributions

Unlike traditional IRA contributions and earnings on either type of IRA, all contributions to a Roth IRA can always be taken out tax and penalty-free. In fact, some people even use their Roth IRA as an emergency fund initially because of this. This applies even to Backdoor Roth IRAs, which is the only way most practicing physicians can make these contributions. However, I would be hesitant to touch a Roth IRA any earlier than you have to. Those tax and penalty free distributions are tempting, but keep in mind that in terms of maximizing your estate, the Roth IRA is the LAST account you would want to touch. A stretch IRA is super valuable to your heirs.

# 7 401K Loans

All right, I can’t really recommend this one. The problem with a 401K loan is that you have to pay it back immediately if you separate from your employer, which is kind of the point of retirement. But it does allow you access to your money before age 59 1/2…as long as you keep working at least part-time.

# 8 Cash Value Life Insurance

This is another one I can’t recommend. If you were suckered into a cash value life insurance policy years ago, and it now makes sense to keep it (as it often does AFTER 10-20 years), the cash value can be accessed to pay for early retirement expenses without any concern about taxes or penalties. Life insurance salesmen LOVE to point out this benefit of their policies. Despite this benefit life insurance is still a lousy investment due to the high fees, poor returns, and overly expensive insurance components so don’t go buy a policy to fund your early retirement. You’re likely far better off with a plain old taxable account invested in index funds. Don’t mix insurance and investing.

What do you think? When do you plan to retire? What resources will you use first in retirement? Comment below!

A word of caution about 457 plans
My 457 plan does not permit a rollover into a IRA upon employment termination or retiring.
When employment terminates, an election has to be made to be made upon when and how to recieve payments ( quarterly, annually,lump-sum etc).
These payments would be fully taxable as oridinary income.
As a 35 yo…chances are, I will not be with same employer for the next 30 yrs and will likely start recieving payments during my working years (payments taxed at the highest marginal tax rates).
I would therefore suggest holding bonds or other tax-inefficient assets and assets with the least growth/appreciation potential ( if such assets are part of your overall portfolio) in 457 plans.

You must have a “private” 457. Most are government 457s and are eligible for rollover to an IRA, 457, 403b, 401K etc upon your termination. Yours may still be worth using as you can defer taxes with it, but the prospect of taking out a fat lump sum and paying taxes on it during your peak earning years is pretty unappealing.

While I whole heartedly support your position of not buying whole life, with the purpose of using it as an investment, there are better things to do with it if you have had it for many years and now are close to retirement. You can use the cash value and dividends, by taking advantage of a 1035 exchange to totally fund a Long Term Care Policy, depending of course on the size of the policies. In my case, my 35 year old policy that cost me about $23 a month is now totally funding itself and my LTC policy.

Be very careful about 457. There was nowhere to roll my 457 from a “private non-profit hospital”. Each subtype of 457 has its own set of rules. Been there, learned that, paid the taxes on all of it .(although my bracket really hadn’t changed that much, it was indeed HIGHER when I separated from service) {although it did grow tax-deferred, somewhat ameliorating the pain}

I was just personally contacted by the benefits lady in HR double-checking to make sure I “really wanted to” contribute to my 457. She said that I was only one out of 50,000 employees putting in $18k this year. Kind of scary.

I have no idea what you mean here: 3) Take advantage of the SEPP rule.
Can you spell it out for me? Literally and figuratively… Sorry but I have no idea what this is referring to.

Can Roth 401k funds be accessed in same manner as Roth IRA funds? How about Roth 401k funds that are the result of an in-plan conversion? If the 401k is rolled over to an IRA, would that change anything? Lots of questions I’ve got and any answers would be helpful.

The rules are slightly different. For example, you can get to 401(k) money after age 55 penalty-free but only after separation from the company. Roth and tax-deferred funds have the same rules inside the 401(k), no matter how you did the conversion.

With a Roth IRA, you can take out the principle at any time penalty free, but not converted amounts. You also have to wait until 59 1/2 even if you retire early unless you SEPP it.

Can Roth 401k funds be accessed in same manner as Roth IRA funds? How about Roth 401k funds that are the result of an in-plan conversion? If the 401k is rolled over to an IRA, would that change anything? Lots of questions…. and any answers would be helpful.

Could I terminate a Solo 401k plan that has a Roth subaccount funded by “Roth Deferrals” and “in-plan Roth rollovers”, roll those Roth 401k funds into a Roth IRA, and then access the funds – up to the tax basis – without paying any taxes or penalties? All this prior to age 55. Any cites and references would be appreciated.

I don’t know. That’s a good question. I’m not 100% sure but I would bet not because they were originally 401(k) contributions, not Roth IRA contributions. If there is a reference, it might be in Pub 590.

I have a solo 401k which allows in-plan rollovers and out-of plan roth rollovers. I’m also looking at ways to to access money prior to age 59.5. I’ve decided to do an out-of plan roth rollover every year with an after-tax contributios and out-of plan rollover to a roth ira on the same day. The entire converted amount would then be considered a nontaxable conversion. Then, per the roth withdraw rules, in the future if I have no taxable conversions or all my taxable conversions are older than 5 years, I could withdraw all my contributions to the roth ira, nontaxable conversions to the roth ira, and taxable conversions to the roth ira tax free and penalty free at any time.

I chose an out-of plan rollover because you can easily withdraw from a roth ira whereas you cannot directly withdraw from a roth 401k.

Presumably, if I did an in-plan rollover in the 401k and a future rollover of the roth 401k to roth ira, withdraws from the roth ira would operate the same. Your original roth 401k contribution amounts and in-plan roth rollover amounts would be documented on the 1099-r for the roth 401k to roth ira rollover.

I had a Fidelity solo 401k plan and I hired Pinnacle Plan Design to amend the document to allow in plan and out of plan roth rollovers. This in combination with a defined benefit plan will enable large pretax and aftertax tax deferred contributions

As far as I’m aware, no prototype solo 401k allows in plan or out of plan rollovers.

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